The Pros and (Mostly) Cons of Mutual Funds

Why purchase a mutual fund?      
The chief reason investors purchase mutual funds are for diversification. A mutual fund may hold as little as twenty securities all the way to several hundred. These can include stock, bonds as well as cash. If your investable assets are under $50,000, mutual funds can be an ideal tool to diversify your portfolio. By investing in a mutual fund, you are in fact paying for a professional manager or team of managers to oversee your investment. Since mutual fund companies have huge amount of money to invest, they may have the advantage of meeting directly with the CEO and upper management of a company before investing. This is certainly an advantage a mutual fund has over an individual investor. If you are busy living your life or don't have the investment skills to research individual stocks, purchasing a mutual fund may be the ideal investment.
Need to sell quickly, no problem!      
Most investors think of a mutual fund as a long term investment. However, selling a mutual fund is as easy as selling a stock. If you place an order to buy or sell a mutual fund, you will receive pricing at the close of the day; not at the exact time you call to place the order. Mutual funds are considered a very liquid asset.
The pitfalls of mutual funds  
As with every security, mutual funds do have their drawbacks. While a mutual fund manager is bound to invest according to the mutual fund's prospectus, you do not have control over what individual stocks your manager buys or sells. If you have an objection to a certain stock such your manager purchasing a tobacco stock, you have no recourse.
Hot one year, cold the next 
With a mutual fund, your money is pooled with other investors. This can create a tremendous problem for you as well as your mutual fund manager. Money may pour into a hot mutual fund you own. This may force the fund manager to hold that money in cash or invest in other stocks outside the fund's intended purpose. This is generally the reason a top performing fund may suffer in its return the following year. Remember, your mutual fund company is all about their bottom line too. The more money they have in assets under management, they more fees they will bring into their firm.
In addition to inflows, there are redemptions your mutual fund manager must take into account. Should there be a mass exodus of the fund you've invested in, your fund manager must sell shares to pay the shareholders who have sold the fund. In many cases, a mutual fund may hold cash to account for redemptions. This may cause problems for you as well as it may put a drag on your total return.
Taxes, taxes, taxes                       
One huge problem and perhaps the biggest drawback to investing in a mutual fund are the tax liabilities you will have at the end of the year. If you mutual fund manager sold stocks due to shareholder redemption or simply sold stocks because they feel that a particular stock within the mutual fund's portfolio has reached its full potential return, your fund experiences a capital gain. This capital gain is passed onto you and you must claim it as such on your tax return; even if you haven't sold any shares. These gains must be distributed to all share holders by the end of the year. Typically a mutual fund will report these gains in November or December. If you are contemplating investing in a mutual fund later on in the year, you must call and ask when their distribution date will occur so you don't get stuck with a tax bill. Here's a double whammy: if your fund had capital gains on some stocks but still suffered a loss in NAV (net asset value), you still may be liable to pay the tax for the capital gains generated early in the year.
Note: This only applies to taxable accounts. If you are a mutual fund investor and it is held in a non taxable account such as a 401k or IRA, the above does not apply as you are not taxed until you withdraw your money out of your retirement funds.

Most fund manager do not beat their benchmark         
If you are getting a little concerned about mutual fund investing, there's more sobering news. Most fund managers do not beat their unmanaged benchmarks. Researchers at Standard and Poor's did a study in 2006 and found that only 38% of large cap fund managers managed to beat the S&P 500 (the standard benchmark which a large cap fund manager would be judged against) over a 3 year period. Over a 5 year period that number drops to 33%. It gets much worse for small cap investors. Small cap mutual fund managers lagged their benchmark by 24% over a 3 year period and just 21% beat the corresponding index over a 5 year term. That means that over a 5 year period, you have a 67 to 79% chance of losing to an unmanaged index. In addition to the reason listed above, there is the human factor. Throughout the history of the market, investors have been seeking the holy grail of investing. If the highest paid smartest mutual fund managers haven't found it after 100 years, chances are it doesn't exist.
Fees and commissions          
As an investor, you are in effect paying fees to a company to professionally invest your money for you. I can't think of a single mutual fund that sends you out an itemized bill at the end of the year. However by law, mutual fund companies must send out a prospectus detailing every fee they charge. If you have insomnia, they are highly recommended reading. Before investing, please call the fund company and consult with your financial planner. Get educated about your investment before sending them any of your hard earned money. Remember, mutual funds collect their expense fees from you regardless of how successfully they were.
Here's a highlight of mutual fund fees and expenses:
1) Class A share fund fee-These are typically known as "loaded funds" and will charge a percentage of 1-6%. Over time, this can take a huge chuck out of your total return
2) Class B share fund fee-These are typically know as "back end loaded funds" and will charge a percentage when you sell your shares. Most back end loaded fund charges will dissipate if kept for a number of years. For example, if you keep a back end loaded fund for 5 years, the mutual fund company may waive their fee
3) Investment management fees-This money goes to cover the advertising and salary expenses required to run the fund.
Knowing your fund's expense ratio is paramount if you are going to have a successful investing career. The average expense ratio for a mutual fund is around 1.5%. This means out of every $10,000 you invest, $150 is being deducted for expenses no matter how your mutual fund performed.
Think expenses aren't important? Consider this fact: $100,000 invested over 25 years will turn into $684,500 if you achieve an 8% return. If you squeeze out just another 2% more over a 25 year period, you will have nearly $1,100,000; a difference of $415,500. This could be the difference between sipping mojitos on the beach and having to take a job as a greeter at Wal-Mart in your "golden years". Invest wisely and consult with a financial advisor. Your future may depend on it.
Larry Lane is the editor for www.InvestorZoo.com, a social network specializing in personal finance
The information provided is of a general nature. Always consult with a licensed financial planner before making any financial decision

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WHY DO I NEED LIFEINSURANCE

The best thing about new private sector players enteringthe market is not just the variety of products they offer but also theinformation they are willing to share. The first thing you should remember whenopting for a policy is that it's not only for your benefit but also for thebenefit of those who depend on you --- your wife, your parents, or yourchildren. In case something unfortunate happens to you, it's your family thatwill have to face the financial crisis. Who will take care of your parents intheir old age, who will take care of your children's education, marriage etc?We're not trying to scare you into taking insurance, but just trying to remindyou that insurance is a wise option every family person should choose. Yourinsurance amount depends on your present and future earnings and the size ofyour family. According to experts, roughly 15 times your annual income should bedevoted to insurance policies.

How to Be a Millionnaire in 4 simple step

Do you want to be a millionaire? Honestly, who doesn't? Becoming a millionaire isn't impossible provided you plan for it and work at achieving it. There are many ways to become millionaires. Some people start their own businesses while others work hard to increase their income by climbing up the corporate ladder. There are also people who became millionaires through investing in stocks, investing in rental properties, setting up online businesses, writing books, developing software as well as inventing new products and commercializing them. The list of possibilities is endless.
The truth is any common people can have a chance to be a millionaire. You don't need much money to start off with, just a healthy dose of discipline and commitment. If you follow a simple 4-Step process diligently, your chances to become a millionaire in the making are high.
1. Earn More Money
Sound like common sense, isn't it? Apart from your active income which is commonly derived from your job, you'll need to find ways to earn passive income. Unlike active income where you need to work to earn it, passive income is money that comes to your pocket without your active participation. Rental income, royalties from books, income from your network marketing business, licensing fees derived from your products and online revenues generated from your website are some examples of passive income streams.
2. Save Money
You need to spend much less than what you earn. Lead a frugal live and live well within your means. If you're the majority that earn a reasonable income and live within your means, you'll likely have money left over to save. There's no need to keep up with the Joneses. Don't be caught up with materialism. It might look good to be spotted driving that sparkling sports car or wearing a dazzling diamond studded watch, but it is extremely costly just to "act" rich. Doing so only makes you look like a millionaire but not actually being one. It becomes pointless if your net worth or bank account doesn't reflect a millionaire status. Don't get me wrong, I'm not against branded or luxury items. If you can comfortably afford such luxuries, by all means go ahead to enjoy them. If not, it would be wiser to save the money for investment and delay your purchase of luxury items until a later point in time. Living reasonably well without putting an extra strain on your finances will leave you with extra money to invest to generate more income.
Learn to pay yourself first even before paying your bills. Making your monthly saving automatic is a good idea. Set up a new savings account and instruct the bank to automatically transfer an amount from your earned income to this saving account every month. This new account is not meant for spending purposes but to be used for future investments.
3. Invest Wisely
Merely putting your money under your pillow or leaving all your money in the savings account will not make you rich. Many a times, the interest earned is far from being able to offset the inflation rate. This means that your money left in the bank would slowly erode over time and thus reducing your purchasing power. No investment action on your part would also mean that you'll become poorer as time goes by. Therefore, it is crucial to make your money work harder by investing wisely to generate higher returns. Carefully study the various investment vehicles such as stocks, mutual funds, properties, commodities among others. Understand your risk appetite before investing as each investment instrument carries a varying degree of risk. Importantly, don't fall for any get-rich-quick scheme. If it sounds too good to be true, it probably is. Investment, unlike speculation, should take a long-term horizon. Don't speculate for risky short-term gains but invest wisely and regularly for the long-term. Set a reasonable target for your return on investment (ROI). In my opinion, a consistent ROI of 8% to 12% is realistic and achievable.
4. Keep Repeating the Process
The final step for you is to keep repeating Steps 1 to 3 as mentioned above. The more money you earn and save, the more money you'll have at your disposal to invest for higher returns.
If you stick to your plan and faithfully work at it, your wealth will grow much quicker and sooner than you realize, you'll be on your way to join the millionaire club!

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